Economists Propose Mortgage Debt Relief

Anybody that has payed on a mortgage or any other loan for six years should now have the debt forgiven.

While we’re at it, why not bail out my losses on Paddy Power?

Somebody has to carry the debt. How is the taxpayer going to finance free houses for reckless borrowers, on top of bailing out the banks?

People need to face up to the consequences and that means, in many cases, repossession. The repossessed can rent their former home or somewhere else (and the State ought to improve tenancy rights, in line with continental Europe).

Otherwise, the moral hazard scenario will simply add more nails to the fiscal coffin.

@Tony Rooney

The banks are trying to defy logic and common sense if they think that foreclosing at a cost of 100k on a property worth 200k which was bought for 300k is going to make them money.

Negative equity impacts not just on consumption but also on unemployment via the fluidity of the jobs market. Even if unemployed homeowners were to emigrate following debt forgiveness it would be better than having them hang on by their fingernails here with no prospect of employment until all legal avenues have been exhausted.

I will say I’m surprised the authors suggest an arbitration process instead of a blanket (but more expensive and necessarily more limited) form of debt forgiveness encompassing those keeping up with payments as well as those in distress. This would be complex, open to corruption, subject to legal challenge and so on. A scheme based on legally specified criteria would be preferrable.

@simpleton

The banks will take nearly all these losses anyway, only foreclosure will also tie up the courts and waste vast sums of money.

I am confused. In one paragraph it is stated that ‘arrears of €10 billion would compare to total mortgage debt outstanding in the Republic of €115 billion . In the context of an overall bank bailout scheme of €50 billion and rising, it is relatively small’. In a later paragraph it is stated that the suggested formula would end up yielding ‘an expected total cost to the entire system of circa €37 billion to €49 billion’. On Morning Ireland a few minutes ago I think i heard Brian suggest a cost of €5-7 billion. The figure of €37-49 billion is close to the total cost of the bank bailout. Could one of the authors please clarify this for me. My gut instinct is that Simpleton is on the button with the use of the term ‘shambolic’. Please set me straight.

@Jim Power

I see you got in there first — at least I’m not the only person with English comprehension problems.

Have the authors of this proposal done their homework on it? If so, where is the reference to a paper or other independent studies that support their formula and provide assessments of likely costs and consequences? The last thing anyone in this society needs is another ‘back of the envelope’ devised solution to a pressing problem, even if it has the signatures of several eminent economists to back it up.

As set out in the IT article, the idea is attractive. All one hopes is that the evidence is there to support it. Otherwise it will be quickly shown to have no credibility.

Jim: two different methods. Read again.

@Brian
I am as confused as Jim. I freely admit that my intellectual capital wasn’t much to start with and has probably depreciated to less than zero but can I humbly suggest that if people like me and Jim can’t figure out what you are saying then you haven’t done a great job on the old communications front?

@Jim @ Simpleton Do you agree that there is an issue with residential debt on the banks’ balance sheets? If so, how would you try to fix it? What’s your solution?

@Andrew I understand your frustration completely–no one is saying people who took out mortgages should have their debt forgiven completely, and people who had their mortgages ‘adjusted’ by some mechanism would not be free to borrow willy nilly again, even if they wanted to.

Sorry, running off to teach, back again later.

Agreed the numbers don’t make sense but the problem is a major one as alluded to by MK several days ago. This will hopefully get the ball rolling further. Surely Irish citizens would prefer to help Irish people more than Irish banks.

The point being made about the bankruptcy laws shouldn’t be lost amongst the whingeing about beds being made and sleeping in them; they are hellish and emanate from Dickensian times.

Even though I am fortunate not to be in the position, and probably stand to loose as a result of something like this, we all know someone in trouble. If the government can decide that Anglo was of systemic importance, I think we can also decide that 100,000 households are also of systemic importance. But for the love of god, as default and IMF look to be imminent transfer these loans back to the banks or to the government before that process starts. We have bankrupt households, banks and sovereign. Lets get one of those three sorted before the other two implode!

JC

@Andrew

These questions are equally applicable to income tax, public investment, social welfare etc. etc. The authors don’t make claims to fairness (although such arguments are relevant to first time buyers of the 2005-2008 period who propped up the entire pyramid), their appeal is to the enlightened self-interest of the nation.

You can either relieve the mortgage debts of the Irish middle classes so they can go back to watching Sky 1 and voting Fianna Fail, or else they will elect some National Socialist demagogue to relieve the debts instead.

Either way, I don’t understand how you expect the Financial-Developer-Oireachtas complex to pay for all this.

@authors of report.

There is a simple solution to this problem. It still involves State/ Banks funds.

If a person genuinely cannot pay the mortgage on his home. The State takes 50% ownership of the home. The State pays the banks 25%, the banks suffer the loss of 25%.
The State remains 50% owner until the person sells the house or dies and has first call on the house sale proceeds.
There would be a nominal rent on the State ownership portion of the house.

I also had difficulty with the poorly explained figures between the total arrears and the extent of negative equity.

@Brian,

Could you summarize those three different methods for solving the negative equity tragedy together with the three different results and the three different cost estimates (ranging from 10 to 49 billion euros)? Just a couple of paragraphs. Most of us don’t have the time of day to practice advanced hermeneutics on your article. Or just tell us how much the Irish taxpayer will have to pay to implement your proposal. I’m not saying it’s a bad idea. But I’d like to know the price all the same.

I think it is a poorly written article as if fails to clearly answer the following three core questions:

(1) What is the proposal?
“we suggest some degree of individual debt forgiveness and restructuring” is much too vague. There are a huge range of options here – what was assumed when calculating the cost?

(2) How much does it cost?
Quite a number of people have found the figures confusing. I’m confused too.

(3) Who pays?
Mainly the Irish taxpayer I presume but there are also non-Irish banks in the picture here.

I don’t follow what is being suggested either and that is not a dig at the authors. I would just like some clarification.

Net wealth of Ireland before policy X
Net wealth of Ireland after policy X

Net foreign debt of Ireland before policy Y
Net foreign debt of Ireland after policy Y

How exactly does this create an improved environment to repair or accelrate the savings/investment balance in Ireland?

This is pretty basic stuff isn’t it?

@Andrew

Those are very broad issues and your scattergun solution of leaving those in negative equity to stew will hit the innocent more than the guilty. Do you accept that extracting debt in full is neither a necessary nor a sufficient condition for fixing all the problems you mentioned?

@Geckko

Consumer behaviour and labour mobility would be improved. Assuming this, it then becomes a positive-sum solution albeit one that will cost the exchequer money.

@ Adrian

“consumer behaviour would be improved” – that doesn’t mean anything.

“labour mobility would be improved” – that is hardly a problem in Ireland and rank about 127 on the list of macro and microeconomic issues currently facnig this country. There are also more sensible way to address this even if it is a high priority (negative equity mortgages perhaps, something I have blogged on).

@ Andrew

I’m inclined to feel sympathy for you. Still though, this should be about moral hazard, not about the sick feeling of bailing out unwise investors. As the authors of the piece say, it is unlikely that moral hazard would be a major issue given how badly burnt everyone is.

@ Paul Hunt

I think you assume that the Europeans are a bit short-sighted. If they realise that big residential mortgage losses are on the way, they will see the sense in acknowledging the loss and writing off some of the debt. Since they have an interest in the overall wellbeing of the Irish economy (even if only as a debtor to them), they may consider a plan like this acceptable.

@Geckko

@ Adrian

“consumer behaviour would be improved” – that doesn’t mean anything.

Um, yes it does even if it was poorly phrased. Consumers would be encouraged to abandon the mentality that brought about the great depression of the 1930s.

“labour mobility would be improved” – that is hardly a problem in Ireland and rank about 127 on the list of macro and microeconomic issues currently facnig this country. There are also more sensible way to address this even if it is a high priority (negative equity mortgages perhaps, something I have blogged on).

It is a significant issue and will increase in importance with time. Both employees’ ability to take up positions in locations other than where they live and employers’ ability to find ideal candidates would be improved.

I would suggest a more elegant solution that should not hurt the banks too much, does not call for huge subsidy and does not let people off the hook.

Idea as follows:

In relation to a person’s principal private residence the bank’s recourse should be limited to:
1. The sale proceeds of the house or reposession thereof
together with the greater of:

1.1 The person’s net liquid assets/savings, and
1.1 €15,000 to be payable over three years on foot of a personal loan for that amount, and
1.2 35% of the mortgagees net earnings over the next three years payable by monthly installments (effectively an agistment order)

BUT the additional sum subject to downward adjustment for hardship by a new division of the the District Court or by a specialist tribunal including people with banking experience (not the morons in the PRTB).

This would require no new bonds and no new institutions other than a tribunal or a Division of the District Court. The banks would not get much less than they will get anyway.

In the future, all home mortgages should be non-recourse. Florida allows recourse to personal assets and it has the higest default rate in the USA so it won’t affect the banks in the future.

I would also suggest that there is reform (for future loans only) to prohibit banks from obtaining personal guarantees from directors of companies save in very limited circumstances. Personal guarantees are a sham protection for the banks but they do enormous damage to an economy’s capacity to recover. The value of the banks is that they provide finance to people. There is no point in keeping your banks alive at the expense of making everybody else insolvent.

Should have said mortgagor instead of mortagee (obviously 35% of the bank’s profit would be too low!!)

@ Adrian.

Are you seriously claiming that not only would this policy not potentially increase moral hazaard, but would reduce it??!!??

The very first type of onsumer behaviour that would be stimulated would be household in “negative equity” rapidly rearranging their circumstances in order to profits from this potential windfall.

That is the big immeditate moral hazard problem. And they extend bweyond that to everyone in society observing how in Ireland there exists a society that allows an ex post abrogation of risk.

The more people here probe the signatories on this the less credible it sounds.

A few points, – I have not posted on this forum before but I feel the following is worth mentioning. Firstly fair play to these guys for finally stating the obvious and speaking the truth about the mortgage books of the banks. Anyone with even a cursory knowledge of the situation knows that there will be massive losses on these mortgage loans. As Morgan Kelly eloquently outlined a few days ago, these losses are going to be highly significant.

2) Because we have a de-facto nationalised banking system, these losses are going to fall on the Irish taxpayer and not on some foreign bond holder (as they should have).

3) Accepting that we have a problem it is imperative that this problem is addressed. We have to outline the scale of the borrowing, it is approx 50 bln, of which it is safe to assume that 1/3 of this is unlikely to be repaid. So we are taking about total debt forgiveness of 10-15 bln euro. Here is how I would do it. Take 5 bln from the NPRF and remove tax reliefs on pensions for 18 months. This will raise 4.5 bln euro. So you now have a total of 9.5 bln euro with which to write down the value of these mortgages. It is not a perfect solution, but there are few others.

4)To anyone talking about moral hazard — frankly speaking it is a bit late in the day for talking about such a concept. The idea here is to get people to become economically productive again, rather than bankrupt. The longer we leave and ignore this problem, the worse it will become.

To all the people criticising this article — 1) do you accept that there is a problem? If yes, what do you propose to do about it? Going through the courts and our draconian bankruptcy system is not a sufficient rememdy given the costs involved and the size of the problem. As taxpayers we are going to pay for this one way or the other, better to face up to it now and get on with life. For the record I am not a property owner.

@ Tecumseh

I don’t understand why you are thinking that way.

Adrian is adamant that you will display “better behaviour”.

Adrian Kelleher Says:

“Negative equity impacts not just on consumption but also on unemployment via the fluidity of the jobs market.”

I think the “success” of the car scrappage scheme somewhat knock your arguent on it’s head re consumption. Given the high marginal propensity to consume imports in this country, why should we be rushing (again) to encourage this “consumption”.

Such was the demand for tickets that Take That “a pop band my l’ud” put on an extra nights concert in Croke Park. Hardly a sign of a return to 1930s austerity.

A survey earlier this week stated that we would be spending a the second highest amount on Christmas presents after Luxembourg,

Re “the fluidity of the jobs market”

We’re not living in the middle of Alaska. There are flights to Manchester from Knock and loads of Irish people can make their way to sporting events etc in Ireland.

Is Karl Deeter an economist, no he’s a mortgage broker.

I hope the Commission knocks this on the head.

Again, I haven’t thought this through in detail, but my gut reaction is very similar to Andrew, Gekko and the “begrudger” on the radio this morning.

I’m old enough to have been chased out of Ireland by stupidity 20+ years ago. This seems like a straw that could drive me out again. Will I get a rent refund, or a bailout for the company I invested in that didn’t work out, or for any of the other stuff that was at least plausibly a good investment but which didn’t work? If my investment wasn’t a PPR, which it wasn’t because they were so obviously overpriced and such obviously bad investments, then I’m just doubly scr**ed I guess.

Even worse, suggestions that my attempt to catch up on pension savings (they’re hard to make in a dying dotcom so I need to play catch up) ought to be taxed to pay for someone else’s house while I still can’t prudently afford to buy are particularly unamusing.

I’ll probably calm down and have more rational response when I have a chance to read and think later, but for now the reaction to some of the suggestions in the article and on this thread is wildly not positive. As I’ve said before in other contexts, as long as taxes are being knowingly misspent – which they are – then taxation has no more moral validity than burglary. This looks to be the same, but wrapped up in even more nice neighbourly terminology.

“Wealth transfer” is a polite term. I’m tempted to use the b word.

@Jim, Carolus

The 10bn refers to current arrears, the 49bn refers to the likely cost of renegotiation and must assume that there will be many who are not currently in arrears, but deep in negative equity, who will be eligable for renegotiation.

@ Adrian,

It is hardly self congratulatory sniping. You need to avoid making through away statements like “consumer will behave better”. It doesn’t help an exchange of opinions.

You and the proponents of this plan need to make a much much stronger case for what would be the largest arbitrary transfer of wealth within Irish society, ever.

@ Brian Lucey,

Could you elaborate this bit of magic: “The losses that will be crystallised in the banks can be filled with additional Nama bonds”?

Are you saying NAMA buys the mortgages at a discount and pays with namabonds? This would still leave a whole in the banks’ capital. NAMA can’t issue bonds on the amount written down as there is no receivable.

the basic benefit of debt forgiveness its: it will force the loss into the bank balance sheets that should have been there all along while reducing the debt issues that are freezing up households. If you are willing to say that borrowers should face their loss because they borrowed then equally risk instrument holders (bond holders) should face any reasonable loss they have signed up for by underwriting the loan to the bank.

Sadly, the state via the Regulator has created a situation whereby the bank cant’ take the property back (nor does it suit them for that matter as it would mean acknowledging the loss) and they have inserted ‘tax payer general’ into the void where they have no business being, because there is already a natural order of people who have chosen to be in that space to take loss (and gain) where appropriate – equity, preference shares, mezz finance, sub-ord, LT’s and finally Snr/Depositors.

Why let people stay in a property rather than turf them out? If we are going to apportion loss where it belongs then the cost of this is measured by net spending over and above that – and moving people/providing alternative accommodation or other means is costly, so why bother if you can get the debt to a point where they can service it?

In this process your credit score should naturally be ruined for a decade, that is part of the price you have to pay, and there should be no second chance at a write down, the question is: which constituency do you wish to serve? bond holders or households

I think Morgan Kelly put it best when he admitted he had no solutions.

@ Ron

correct. I have a decent bit of cash saved up, and was going to throw it at the mortgage now that i have come off the fixed rate last month. This suggestion makes me think twice.

@ the Authors

I agree that we need to do it but only if accompanied by large default and massive austerity.
Otherwise,
Where do we get the money or credit to do this?

If all you are suggesting is tranfer of debt from mortgage holders to the tax payer where do we get the money to afford it?

If the answer is nama then arent you forgetting that there will be no Nama for the little guys?
You are also presuming that the ECB will allow us to do this through Nama.
Rather big presumption that. Who will guarantee our promissory notes?

@ authors
I think the message you really wanted to convey is that you care. Most of us do to be honest, but I really think there is little useful content in the article. Perhaps the predictable forum you chose to show you care is too limiting to set out a plan in detail.

@Brian Flanagan
I’m sorry to bring this up in this thread, but I’m tired of seeing it here and hearing it on RTE ad nauseum. Could you please explain how NAMA is a debt forgiveness scheme for big borrowers?
Now maybe I’m wrong, but it strikes me as a stupid statement.
It is unfortunate that our laws allow all borrowers transfer assets to their spouse’s name, but those laws have nothing to do with NAMA.

@Geckko

Economies possess more than one equilibrium state, a fact Keynes identified qualitatively but which is poorly understood quantitatively. One such equilibrium was the great depression, as was the US depression of ca. 1870-90. These events cannot be described algebraically by economics because economic models are rely either on simple pictures of human behaviour or are mere exercises in curve fitting or both. Real humans’ economic behaviour cannot be mathematically described.

The statement you refer to and which I have already clarified once stands on its merits. It’s a simple borrowing from Keynes, a man whose ideas can be put to uses both good and bad. If you object to Keynes in principle, please state so now.

There’s nothing arbitrary about the proposed measure, nor is it even a transfer of wealth properly speaking unless the provision was very large as the banks have no hope of ever extracting this cash from bankrupts. As with Zhou, I would have my own design for dealing with the issue. Breaking the moral hazard issue into two parts, that past and future, the period -2008 is already past and a well designed scheme could neutralise the risk of people working the system. The specific alteration I suggested in my first post would contribute to this.

The state conspired with banks, estate agents the print media and supposedly ‘independent’ institutions such as the ESRI to engineer this disaster. People were mislead. On Apr 13th 2006, Brian Cowen said that “the buoyancy of the housing market primarily reflects the innate strength of our economy’s performance over the last decade or so”. The scheme proposed, or something like it, is very possibly a legal duty of the state.

I wonder if those who find capital transfers so appalling ever received mortgage interest tax relief or government largesse in any other form. If so, their objections are situational rather than principled. For the record, I would not benefit personally from this measure and nor would anyone in my immediate family.

@Jimmy G

People making their way to sporting events is not the same as commuting.

@Ron

Here’s what you wrote initially:

or..consider the possibility that through your hard work you manage to save the 500K needed to clear your mortgage (for example).

the slightest possibility of debt forgiveness might mean that youre better off hanging onto the money yourself.

Now this may be correct or equally it may not be, depending on the nature of a given scheme. As I stated above, my preference would be for a scheme that did not discriminate against those who kept up their payments. This would eliminate one source of gaming. Other sorts of unintended consequences could equally be eliminated with a well-designed scheme.

I feel the category of those who bought in the 2005-2008 period, are now in negative equity and are either overpaying or have cleared their mortgages is so small as to be not worth considering prior to drafting a final proposal.

Re: Adrian Kelleher Says:
“Jimmy G

People making their way to sporting events is not the same as commuting.”

Where are the jobs that the 400k plus out of work are preventing from going to because of negative equity?

Re: Karl Deeter Says
”
In this process your credit score should naturally be ruined for a decade, that is part of the price you have to pay?”

Do you really think the bandwagon started by the Sindo et al and promoted by yourself et al in this proposal will stop at Mr and Mrs Canny McSavvy being prevented from lumping themselves (and by extensnio if this goes through the rest of us) with debt?

The next cry will be that it “isn’t fair” to impose a ten year curfew on them. After all one once the debt of these Savvies has been loaded on to all of us from them (the hard bit at present), the next cry is that they should be allowed to “normalise” their affairs.

The above comment was directed at Karl Deeter not Karl Whelan by the way

@ Andrew: ““debt forgiveness is INSANITY! the money will have to come from somewhere,”

No andrew. You must try to understand what money really is! Debt is REAL, so you MUST use REAL money to pay debt down. Think matter v anti-matter. When they meet POOFFFF! Money is destroyed => deflation. OTOH – canceling debt – Bingo! You have some real money for real things!

The mortgage originators are primarily responsible. They were (very allegedly, you understand) the experts. They had Credit Risk Depts and conducted thorough Due Diligence on eacvh on every maotgage application to ensure that the prospective mortgagee had the income to sustain the debt load they were contemplating. They (the originators) DID do this ???? Oh dear! Seems ‘they’ neglected their fiduciary duty. No worries. Now Mr Woods, could we have the keys please? No! No! No! “From my cold dead hand . . .”

They (the originators) abandoned the Iron Law of Mortgages – look it up. When you abandon an Iron Law – the consquences are, well, unpleasant.

Cram-down must come. Cheers.

Read: Wealth, Virtual Wealth and Debt: Frederick Soddy. Difficult to source, but key insights relative to debts.

Disclosure: No mortgage debts.

Brian P

@Brian Woods
You are attributing that quote to me. It was Karl Deeter who wrote that hence the quotation marks. Now Karl has done the proverbial U-turn. Pay attention Brian.

@Jimmy G

Your point has no substance. That negative equity causes unemployment is common knowledge.

@Andrew, Eamonn etc.

You seem to assume the banks will be able to get this money off of people if the government doesn’t help them out. A bank holding the deeds to a 300k house as security against a borrower owing 200k has leverage over that borrower. Where the security is only worth 200k and the loan is 300k, the borrower has leverage over the bank.

Anyone who thinks that a little debt trouble for a minority of the population is the limit of the current crisis has no imagination. The more I read, the more I think Morgan Kelly’s premonition of the rise of a hard-right party may be correct. The IMF is not the worst case scenario — that would be a generalised LA-riot style event.

What would happen if Ireland, Spain, Portugal, Greece etc. just started dropping out of the global financial order one by one? In 1913, the United Kingdom and the German Empire found a rare moment of entent when they jointly occupied Portugal to extract debts due. Sending in the tanks isn’t really imaginable nowadays. People wanting worst case scenarios should broaden their imaginations a little.

@ Adrian,

WRT Keynes, Ireland is NOT in the midst of a profits, or Keynesian recession. We are not simply awaiting some kick start to the investment-output-income cycle. For a better explanation of our predicament I suggest you consider Ramsay – multiple dynamic equilibria and adjustment paths there also plus some explosive ones to boot.

A netting out of our debt between ourselves – a wealth transfer – is no credible policy for this country.

And if a policy that, writes off the debt of one section of society financed by all of society or some subsection of society isn’t arbitrary, I don’t know what is.

The ‘bail me out or I’ll vote for the blackshirts’ is an original angle, I’ll concede.

I don’t think it’s possible to assess what (if anything) should be done on mortgage relief in isolation from the legal questions. To what extent did the banks etc. violate regulations or the law in selling residential mortgages during the boom years? And if there were such problems, or if the banks simply let their mortgage paperwork slip, then to what extent does this endanger the banks’ legal right to repossess houses and so on? Obviously these things are closely intertwined with the matter of how a mortgage-relief scheme should or could operate. For example, householders are likely to shun the offer of a binding arbitration if they’re hopeful of getting a better outcome by challenging their mortgage in court; while on the other hand, bundling homeowners into a binding arbitration (whether by persuasion or by force of law) is likely to be a grave injustice if their mortgage is, in fact, defective and they would have been much better off going to court. This is another case where it would be great if this blog could somehow attract more input from lawyers. (That’s not meant as a demand for better service for my money!)

Of course now someone is going to tell us don’t be daft, the Irish banks’ mortgage holdings sit on a rock-solid legal basis. Maybe: and it does seem to be the case that most Irish mortgage claims weren’t thrashed all over the continential United States by complex financial instruments. But I would be slow to take the reassurance for granted. First, because apparently it’s the case that atrocious paperwork and shady dealing (and deliberately atrocious paperwork in the service of shady dealing) are prevalent at the height of most gigantic asset bubbles. Second, because of our track record. It’s fortunate indeed that Bill Black is in Kilkenny this weekend. Someone should certainly ask him how he’d appraise our DIRT scandal – where senior bank managements were actively uninterested in what was happening at branch level – in the light of his study of “control fraud”. I’m confident that our banks did indeed learn lessons from the DIRT saga – I’m just not sure what lessons. Of course, since Black also has a lot to say about the current legal situation in the US housing market, it will also be very interesting to note what he has to say about how things stand here.

(Speaking of which, let me roll out my little campaign again: Bill Black for Director of Corporate Enforcement. If you want to see important people going to jail over our banking crisis – and not just the divil Seanie and one or two other designated scapegoats all from Anglo, either – then Black is your man. As one of the people who resolved the ’80s S&L crisis in the US, Black helped to secure a large number of prosecutions of senior businessmen, in the teeth of serious political (and ideological) opposition. I also have an idle hope that Black might be interested in the job as a way of raising his profile in the US. Attention opposition parties! (Or indeed Government parties if they’re so inclined.) Promising to install Black as DCE would probably be a very popular campaign pledge come the election. Someone really should approach him and ask if he would give serious consideration to a serious offer of the job.)

maybe we should go for this option.Actually punish those who were prudent. This is from a person who advised people that the banks were well capitalised and safe on Sept 16th 2008 and has a consumer advice website and has since been appointed to the advisory panel on mortgage debt. This is the upside down and hypocritical world of commentary in this country.

http://www.askaboutmoney.com/showthread.php?t=146453
Originally Posted by Brendan Burgess
The people who benefited most from the extension of the deposit guarantee were the depositors in the guaranteed banks.

So charge all those depositors on the night of the guarantee 10% of their deposit in excess of €20,000.

Charge those in Anglo and Irish Nationwide an additional 40% as they would have lost everything.

It wouldn’t apply to deposits in Credit Unions, although Credit Union deposits in Irish banks would be subject to the same deduction.

@Brian Woods,

You correctly ascribe primary responsibility to the mortgage originators. But this does not solve the question: what are we to do now? As John Doran has pointed out, even to think about thinking about debt forgiveness will have a negative cascade effect. Besides, virtually all of the country’s debtors will be tempted to rationalise defaulting on the grounds that they were, after all, ‘duped’ by their wily or naive creditors and that — since bad debt is nobody’s fault — it’s everybody’s fault, hence ascribing a kind of Kollektivschuld (‘collective guilt’) to the Irish people. Or rather to the taxpayers among the Irish people.

Being a passionate Georgescu-Roegenist I much appreciate your deference to the immortal Frederick Soddy. But you are wrong in concluding that cancelling debt will lead to the creation of ‘real money for real people’. Cancelling debt means only that somebody else will have to foot the bill. The entropy law notwithstanding, answering a fool according to his folly is not the best medicine.

@Andrew Nov 11th 9.04
Completely agree. We need a cultural change which might be achieved when we get a generational change.
Adrian Kelleher
November 11th, 2010 at 9:45 am
The Elephant in the Room is the E.U and the Euro. Ireland is a region of the EU rather than a sovereign state.

With so much money going into mortgages at present, this will put the Kaibosh on any increase in growth.
And it is growth that has been identified as the crucial need for the Irish economy?

@Marian

Can I refer you to this link
http://www.planware.org/briansblog/2010/05/nama-is-bailout-for-builders.html

“It is unfortunate that our laws allow all borrowers transfer assets to their spouse’s name, but those laws have nothing to do with NAMA.”
IMHO, this law is a good thing but it can be abused when it enables defaulting borrowers move sunstantial assets beyond the reach of their creditors (such as Nama) as appears to have been happening.

Aine Ui Ghiollagain Says:
“@MarcusOC
Lots of people in the UK property market were terribly badly burnt in the late ’80s. This time it WAS different: it was much worse, and many could not even countenance how far we had overextended ourselves.”

What’s with the “we” paleface.

Is this the Royal “we” or the bunch of stooges that “we” can lump our troubles on?
I didn’t hear anywhere in dispatches where “we” wanted CGT to be introduced for the PPR, to prevent flipping of the “we” who wished to advance up a mythical object called the property ladder.

The idea that someone living on a social welfare widows pension and carer’s allowance only should have their rates cut while “we” are bailed out for greed is an abomination.

I heard on the radio last week a barrister explaining that a couple (one a teacher the other a lecturer) on over 100k per year on a 600k mortgage couldn’t be expected to pay off that mortgage.

Well I expect that should. Their post tax pay is c. 75K (back of envelope calculation). Their mortgage is say 100*6*12 (based on 6k per 100k per 12 months) or €43,200 pa leaving a post mortgage pay of almost 32k (31,800). I’m not allowing for mortgage interest relief in this calculation.

Under the Croke Psrk agreement these people’s pay can’t be touched but the aforementioned widow and carer can. Get a grip.

In reference to my skeletal idea above I think the idea of a start date of 01/01/08 should be discarded and payment history back-dated to the start of the mortgage. The original nominal schedule of payments doesn’t change throughout the repayment period (e.g. 20, 25, 30yr mortgage) so there is no penalty interest accruing. In this set-up it is considered that real debt forgiveness will be postponed until well into the future and only after a sliding scale of hardship has been experienced. If houses in negative equity are sold in the interim then this can offset the schedule payments and improve the overall payment % but the remaining debts stay with the person until the end of the term.

So say the monthly payments of a mortgage are €1000 and it was originated in 01/01/2006. If by 01/01/2011 5yrs of full payment have been made and are then completely discontinued for whatever reason then at 01/01/2013 the score will be 71% – not enough for repossession but a range of restrictions will apply. If little or no effort is made in subsequent years then repossession comes rapidly on the cards but otherwise ones best efforts at repaying are rewarded by fewer penalty restrictions. This is of course for fixed rate mortgages so variable ones will have a different schedule profile but the overall idea is the same.

Sounds convoluted and don’t know how to consider multiple properties but it seems to me as a possible compromise between widespread repossession and too easy debt forgiveness.

@MH

“As regards laws on personal bankruptcy, research shows that in US states with liberal laws on bankruptcy, banks have more restrictive credit policies.”

Florida allows full recourse mortgages. Florida has the highest rate of home loan default in the USA.

More restrictive credit means the bank insists the price paid for the asset is more than it is worth. Isn’t that good for consumers? The home equity that caused the splurge in the UK and Ireland was illusory. Illusory assets are not a good thing to be counting on.

Having now read the article I have to say that it’s sufficiently vague that it’s almost meaningless, apart from the aim.

The aim seems to be to give a free pass to everyone in negative equity on the basis that their spending power is going to be very restricted for a long time. Yes, the article talks of well over 200k mortgages in negative equity and “only” 60k in arrears in the downside scenario of 55% price drops.

But hold on a minute. People in negative equity would always have had restricted spending power as long as they continued to pay their mortgage, wouldn’t they – unless of course they were depending on flipping or remortgaging at some stage? Frankly, I don’t fancy bailing people out because their expected ability to do a big equity withdrawal has not come true.

On the arrears, here you get into the difficult area. Still, perhaps a better solution is to simply reform bankruptcy rather than creating complex and gameable bailout schemes, ripe for abuse.

If you’re really broke then you get to walk away with some pain but not 12 years of horror as in the current Irish system. However, it’s hard to game a system where the best you’ll get is to walk away with little or nothing. If you have a skill and a job then you can start spending again too.

Of course, we don’t want to make bankruptcy so easy that people in negative equity start aspiring to it, but it still seems less likely than people in negative equity aspiring to be bailed out under the current proposal.

In respect of the NAMA banks alone with figures taken from their latest reporting (some of the numbers are interpreted):

Residential mortgages – €105bn (non-NAMA banks will bring this up to €115bn)
Personal lending – €12bn
Non-NAMA commercial property – €70bn
Commercial lending – €70bn

So NAMA is giving clarity to some land and development loans. What is suggested today is the reality of the residential mortgage lending be addressed. What about commercial property and non-NAMA propertyy (commercial is down 60% from peak and the sub-€20m or sub-€5m land and development lending is likely to be down 75-90%) – who will bear the undeclared losses on these?
What about the €12bn in personal loans? The credit cards? The car loans? The home improvements or the Maldives holiday long forgotten? How many of these will default?
And what about commercial lending? With GDP down 11% with a measly 1.7% on the cards next year. Does anyone think there is a commercial lending car crash waiting to happen?

I think the article today is a worthy start to recognising the reality of another part of the banks’ loanbooks but there is more to come. Shouldn’t we be looking for a strategic comprehensive solution to the entire loanbook which as far as I can see will involve either default or multi-decade debt repayments.

…but the remaining debts stay with the person until the end of the term….

…and beyond for a pre-designated length of time – i.e. the debt doesn’t just vanish at the end of the term if left unpaid but is gradually forgiven over a further period with penalty restrictions still applying.

@Jagdip

Can all the other individual loans you mention e.g. credit cards, personal, car, holidays etc. also be lumped in together with the mortgage schedule in the scenario presented above but they retain their ability to attract additional penalty interest at a reasonable rate?

This is getting more convoluted and I’m waiting for someone to expose the big flaw!

“Real humans’ economic behaviour cannot be mathematically described.

Best quote of the day!

Rational Choice and Expected Utility theory assume that humans are all-knowing, all-seeing, can estimate probability and assign risk . . . ie: we’re Vulkans. Well we are not. We are emotional beings. Make some awful decisions!

Capitalist market mandates an attribute known as ‘sunk cost’ in specific consumer transactions. Those debts we are discussing are in part or in whole, sunk costs. What happens to sunk costs?. I do distinguish between what cannot be paid back, and that which will not. Its the former I am concerned about.

Why the visceral reactions? There were two parties to a mortgage and loan agreement: originator and mortgagee. So. Both are Vulkans posing as humans? No? OK, so now you enter the middle world of Behavioural Economics. You leave neo-classical – and visceral reactions outside.

Consumers buying a property are in a high emotional state. The originator is in a somewhat similar state – pressure to perform etc. Not attempting to pull any fancy excuses for errant behaviours – just describing the situation as I experienced it.

1 Originator: Lots of experience at this sort of thing. Has all docs (I hope!). Has Check List from Risk Department. Senior management have instructed originators to abide by Iron Law of Mortgage Origination (keeps potential defaults below 1%). Conducts a thorough Due Diligence analysis of the buyers. Has access to a data-base to cross-check appraisers report.

If any of these nitty items are side-stepped – you SHALL end up with a bad mess. And regretabbly we have. So, the most important question to ask is: “HOW was mortgage processed and signed off?”.

2. Appraisor: Gives appraisal value to ensure sale. Commission depends on. Moral Hazard?

3. Buyer: High state of anxiety and emotion! May be telling porkeys? These would be detected by Due Diligence.

Now please try to convince me that each of these persons are acting in accordance with the constructs of Rational Choice and expected utility theory. They were not. I pass.

Questions: What is money? (if you answer that ‘it is a medium of exchange’- you’ll get an NG). Is debt money? A mentor insisted I answer these questions. That was nearly 3 years ago and I still have not got my head around the answers. Very slippery concepts. Off you go then!

Who bears the loss: Homeowner – asset value is written down. Bank has a sunk cost problem and if homeowner has lost wage income – lower level of income stream. If bank is liquidated, new owners deal with problems. However, if the banks are nationalized – then we (taxpayers) are left with both problems. So now you know. Liquidate the banks PDQ! Oh – ECB say “No can do!”. Shucks, we are on our own with this one!

That all folks. I said more than I wished. I shall refrain from replying to any comments.

Brian P

@finfacts

So what will the extra cost of non-recourse mortgages be or like burning bondholders, it is cost free until it’s not.

Do you mean ‘not burning bondholders’ here? Because I distinctly remember not burning bondholders being cost free, until it wasn’t.

@andrew @eamon moran when facts change, i generally change my mind, what other choice is there? I am still against debt forgiveness in principal, and you clearly didn’t read my comments above: my support is because it will force the losses into the banks, the other alternative is to put those losses onto society general and that is a bigger mistake.

I was on the front line calling for a fast resolution, generally it should be ‘pay or possess’, but our regulator, state, banks and every politician don’t want that so we can’t get to any position of truth on asset values and at the same time we are letting people stay in properties the cannot afford. So let the bank realise the writedown, ‘debt forgiveness’ is another word for ‘writedown’ or ‘loss’, and in this case the loss goes to the investors in the financial insitution, apportioned according to their loan book quality.

It may turn out to be moral hazard, and it will come at a cost, but in any case – I’d rather see some damage done to holders of investment instruments first before we inflict it upon the taxpayer.

let me make it simple: our banks are lying about thier asset values (on residential loan books), you either want to help them carry on that lie or realise it, if you prefer the latter then you possess houses (we can’t because of CCMA/Regulator/State/Banks don’t want the writedown), or in the absence of that you write down asset values accordingly. The flipside is ‘forgiveness of the debt’ to a degree to those who are holding that debt.

@Geckko we already practice transfers all the time, it occurs via taxation – the state is a redistribution mechanism in practice. Hitting bond holders is merely having the liability side of the balance sheet brought in line with the asset side of it, unless of course you believe our assets as currently priced in the banks are priced correctly?

@pongo this wouldn’t be a ‘free money for all in negative equity’ scheme, it would be designed for those who cannot pay their current mortgage and have been assessed to that degree, there are of course others who will never be able to pay and they probably should be repo’d.

@DavidBurke the funny thing is, that you are paying for this already, and you’ll pay a lot more if we let it get to the point where there is nobody other than the taxpayer to foot the bill, currently we have a group of people lined up to take some of the pain, we either utilise that or we don’t.

Karl Deeter,

I understand where you are coming from. But here is the rub. If you force a writedown on the asset side, equity gets written down first. Most of this equity is state owned ranging from90% plus in the case of AIB and 40% in the case of AIB. So you wipe out a good chunk of the NPRF. Then your choice is i) refill at the taxpayers expense or ii) call in the bondholders.

Unfortunately you then confront the reality of the custom and practise operated by the ECB-no bondholder left behind.

@Zhou
“Without wanting to insult Ronan Lyons and Karl Deeter, ”
I think your missing an et al there.
More seriously, yours is one of the few comments that say : right lads, that wont work, but this might. And it might. Im not at all wedded to the solution we put forward – i am wedded to the inelucitable fact that we need to realise, in all senses, that yep, theres another hole in the ship. Too many posts here one can see the sneers dripping off the screen – not yours, so hat tip.
BTW- the idea of this dysfunctional polity doing the sort of radical, long called for, changes you suggest ? Close to the odds of they doing our idea….And aint that saying something.

More absolute nonsense and silver bullets from the “deposit seller” and his fellow travellers. I am surprised this beauty wasn’t held back for the fest. Or can we expect some real corkers this weekend.

You want a real loser constituency? Consider all those pensioners and others (including charities, parishes etc.) who have been wiped out by the collapse in bank share prices.

Are we really going to bail out people who are in negative equity and yet who are paying much less in servicing their mortgage than they signed up for, whilst not doing something for the devastating hard luck cases above?

The February thread, “Expert group on managing the household-debt-crisis
“debt forgiveness” two matches from 49 comments.

shttp://www.irisheconomy.ie/index.php/2010/02/25/expert-group-on-managing-the-household-debt-crisis/

Move on 9 months. this thread “debt forgiveness” 34 matches already, what will be in six months time?

Reading through the thread and selectively ignoring the snark, it’s clear Zhou’s constructive proposal is well thought out, and could well be a better solution than we advocate, thanks Zhou.

@Jagdip, of course you’re 100% correct, the total debt pile is a strategic issue.

No one is suggesting there is a tooth fairy-type solution to this problem with no consequences for anyone. The point of the piece was to highlight that this is indeed an issue which should be considered. I think we did that, and I’m happy we wrote the piece as we did. As I’ve written elsewhere, if–and it’s a big if–the costs outweigh the benefits to a particular policy, we should think about implementing it. I’m open to any evidence-based constructive proposals to that end.

@Carolus

It sounds like a brilliant show, I will be there. The telling thing is that the last time BL did a whip around he got 48 takers, this time round he’s reduced to the few economic entertainers.

Can I get a bailout from the Irish taxpayers for the Intel stock I bought in August 2000 at $63.77 a share and is now worth only $21.04?

Where is Eamon Ryans ‘bankruptcy lite’ plan …when we need it like ?????

1. Just for the record. The authors claim the banks were “forced” into delaying repossessions earlier this year. The fact is that, until this year, AIB had not repossessed one house for over 8 years

2. Affordability of mortgages is not usually effected by a change in the value of the underlying asset. It can be effected by rising interest rates or loss of employment income. But these always have been normal risks in taking on mortgages. Our recent rise in unemployment is not caused by the banks or their shareholders.

3. Householders who want to trade up will find it cheaper than previously to do so. Those who wish to trade down will have lost some equity, but the much greater number of these are elderly, who have already lost great fortunes in bank shares, etc and many are very vulnerable, some suicidal and no scheme has been proposed for them

4. The house value crash is not so much a problem for the borrowers- for reasons above- as for the banks themselves. The banks may have to recognise theoreticalor contingent losses on loans when they stop performing. That could be very serious for the banks, and ultimately the taxpayer, including mortgagees. For that reason, rescheduling mortgages is a much better option, allowing the banks to “sit” on devalued assets until they grow in value, which they undoubtedly will over the period of typical mortgages. In other words, the banks have the ability to finance these temporary losses over the loan periods, from future profits, as long as the loans are performing. it seems to me that some of our hysterical celebrity “economists” hate the banks so much that they would like to encourage defaults

Here’s the condensed version of the potential solution given above in instalments. The idea is that it is a compromise between ruinous widespread repossession and uprooting of families and unpalatable debt forgiveness. People who pay as much as they can are rewarded and other taxpayers who did not buy property or suffered other types of losses see that the nominal debt stays with people for many years and is not so easily forgiven. It will also fairly quickly separate those that are likely to pay and those that are not and gives them clarity and flexibility in each case. Let’s call it DATS (Debt Assessment Test System).

INITIAL ASSESSMENT

Those whose mortgages originated before 01/01/2000 are assessed on the 01/01/2012, those in the years 01/01/2000 to 01/01/2005 assessed on the 01/06/2012, and those since that time are assessed on the 01/01/2013. No repossessions should be allowable before these dates.

In assessment all payments made will be quantified and divided by what the total scheduled nominal payments should have been at the assessment date to give a percentage or score. Annual coefficients to reflect variable mortgage rates can be calculated for each year to equate fixed/variable schedule payments.

No additional interest penalties should be considered for mortgage debt as this just compounds an already huge problem and leads to hopelessness. The proceeds of selling a house or houses prior to the assessment date can be used towards reducing the amount of the outstanding mortgage. This will either completely clear the debt or improve the score with the remaining original debt schedule following the person.

The maximum length of time allowed before which debt is completely cleared is until the end of the original term plus an additional five years.

INITIAL RESULTS

Scoring below 40% will mean repossession should proceed but the actual score will dictate the standard of house provided through the social services system i.e. a score of 35% and a score of 5% will lead to very different outcomes. NAMA could play a central role in this case by providing suitable accommodation.

Scoring above 40% allows one to remain in their house and a panel of experts devises an increasing list of penalties from 0 at 100% to fairly draconian at 40%. This sliding scale would involve restrictions in the form of access to credit, ownership of certain assets, and ability to hold down certain roles.

ONGOING RESULTS

At the end of each subsequent year after the initial assessment a new assessment is made on the basis of the repayment performance within the preceding year. Thus scoring higher will lift penalty restrictions in the case of those who passed the initial assessment or improve living conditions for those who failed and are in the social services system. The emphasis in this case will be on the effort made to pay and a panel of experts can decide the mechanics of this.

ADDITIONS

Where other types of personal debt e.g. utility bills, personal loans, credit cards are also experienced by the debtor there should be a system devised whereby these can be added to the overall mortgage debt due while retaining their ability to attract additional penalty interest (within reason) and any future losses should be shared with the issuing company e.g. ESB, MBNA etc. This aspect would need a lot of further work to assess its feasibility and the mechanics of it.

Subsidies on top of paying the debts of banks!?

Lunacy! Great idea for driving the bond rate higher, euro lower though!

Genius!

Not. You proposers still seem to have no understanding that the disease is the “easy” credit! The remedy is deflation. It is always inevitable, part of the credit system. Low interest rates exist because no one wants more debt. Paying off someone’s debt is creating more debt somewhere for someone. That debt again bears interest and must be paid off! Worse, you punish the prudent who avoided debt by rewarding the profligate.

I presume this was just a test to see who was daft enough to support the idea? Like a car scrappage scheme?

@ Remnant

Those are fair questions and I will try to answer your points. I can only speak for the proposal I put forward in this which is purely based on pragmatism.

I don’t think this is just a problem associated with young attractive middle class families. The personal debt problem (mostly mortgage-related) is across all of society, from vastly overpriced property in former council estates to elderly farmers investing a few bob in buy-to-let and so on. In my case also (as a renter who might buy a property reasonably soon) I would not consider myself to have a vague desire but a strong conviction that society (and the economy) will be much better off if some type of compromise is reached. For a start many families would be far more sure of where they stand and the potential options will become much clearer and this should take away a lot of the current stress (fear of unknown) which is affecting the health of adults and children alike.

With regard to owners versus renters I think the solution I am proposing will be difficult for owners. They still have to pay at least 40% of their boom-time mortgage to stay in their house and will face many penalty restrictions unless their payments are closer to 100%. In the meantime there will be inevitable repossessions as some people will be unable to meet the 40% and property prices will drop enabling current renters to get cheaper houses or rents. Real write-downs will also not occur for many years hence in the case of the longer-term mortgages and the ‘Sword of Damocles’ effect will be there.

With regard to ‘uprooting’, I think it is fair to say that owners are more embedded in the fabric of local society than renters – I’m thinking of GAA clubs, school committees, choirs etc. and these things are an important aspect of our society. Of course this may be considered a woolly argument !

One of the key aspects of the DATS proposal is that people are always encouraged to pay as much as they can reasonably afford and by doing so will lesson the burden on the banks (taxpayer). In doing this no unnecessary hindrances should be placed in the debtors’ way in their own efforts to improve their future earnings. I think this combined effect will have benefits on the macro scale.

I believe this proposal would be more transparent and more difficult to fiddle around with than some of the other suggestions I have heard here and elsewhere.

@Remnant

A. The program’s details are vague but if you were to do a analysis of where this money was going I would bet that the largest gains would be people who bought big homes in fancy areas.

There’s no reason for this to be the case.

B.

B1. Also, won’t 80%+ of any consumption just go on imported goods given that we’re a Small Open Economy?

I don’t know where you got that 80% figure from.

B2.Freer Labour Mobility: Huh? Strikes me there are a million cheaper ways to get this. Plus don’t we have 12%+ unemployment and spare labour capacity in every area of the country?

This was not the primary motivation and wasn’t even mentioned in the article. It is nonetheless a fact that negative equity will contribute to converting temporary unemployment into structural unemployment.

C. This is a free money not (Irish) taxpayer money through some (vague) ECB mechanism or because we’re merely taking it from the “banks”

I don’t know who made this argument but it wasn’t in the article.

Someone stated: “Take 5 bln from the NPRF and remove tax reliefs on pensions for 18 months.”

Yes – we could do this or we could use it to cut the waiting lists at Crumlin Children’s Hospital, or cut the marginal income tax rate, or the corporate tax for MNCs, or to provide all manner of public goods or services or massively reduce class sizes or a million other things. Isn’t the main point of economics about opportunity cost and scarcity of resources?

Considering you started by saying you were going to “understand the various rationales that were advanced and see if they hold water”, it’s unaccountable how you’ve overlooked the most obvious and pressing rationale as mentioned by Karl Deeter: the money is gone, and will never be seen again.

NAMA and the banks have the same dilemma. If they foreclose and cash in they dump their assets in a dead market. Debtors know this and have every incentive to game them. Banks have very little leverage over those in negative equity. Why do you think it is that solid foreign banks haven’t been rushing in to the Irish markets to avail of the steadily increasing margins here?

If a house is now worth X, the foreclosure cost is Y and the debtor makes repayments to the value of X+Y+a where a is some arbitrarily small amount then the foreclosure option will cost the bank money. In fact if all those in negative equity began simply making repayments to the current value of their homes in the morning instead of the price they paid, the banks could do nothing about it without shooting themselves — and by extension us — squarely in the foot.

The principle rationale offered is that these losses already exist and cannot be avoided by the banks in any case. Debt restructuring would at least offer clarity in addition to the other benefits mentioned.

Much has been made of moral hazard in arguing against the idea; what about the moral hazard inherent in current arrangements? This isn’t just theoretical: have a read of this piece of advice given to someone afraid he might lose his home.

I’m still waiting to hear about the part where the lack of lenders, borrowers, etc finally causes property prices to fall to some actually reasonable figure affordable to the ordinary working stiff.

These 67 meath acres (http://www.daft.ie/searchsale.daft?id=563030) recently drew a bid of 1 Euro (!).

A press article mutters about community anger, and support to the foreclosed seller – perhaps a plausible narrative – But also perhaps buyers are nervously awaiting concrete info on future property taxes, which would in effect make any such acquisition a potential liability .. and if too much was paid, and prop-taxes were price-based, it could be ruinous.

In the end I hope that the property prices will decline to realistic affordable levels, reflecting realistic rent and the incomes we will be experiencing in the coming high-tax deflation environment.

Propping up the market to save pension funds or keeping an expensive floor under the market to woo certain voters only prolongs the inevitable – grown-ups will have to confront the grown-up consequences of their grown-up actions, to wit : lazy thinking, lack of critical analysis, and fantasy economics..

We propose instead to slaughter kittens for their fur.

Been on holiday & a bit surprised about this (I can’t find a polite word to call it).

Would foreign banks operating in Ireland be forced to participate in this debt forgiveness for mortgage holders?

If there ever was a time to withdraw lending to Ireland it is when debt-forgiveness is being discussed. If the foreign lenders are scared off the amount of credit available for Ireland is likely to decrease.

The suggestion is unfair & it won’t work as it will only make the banking situation even worse.